Bank of Canada rate cut bets pick up as crude hits 12-year low

Tue Jan 12, 2016 4:47pm EST
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By Fergal Smith

TORONTO Jan 12 (Reuters) - Bank of Canada interest rate cut speculation intensified on Tuesday as crude oil prices and the Canadian dollar both weakened to 12-year lows, with traders pricing in a full 25-basis-point easing by mid year.

The Canadian central bank cut rates twice in 2015 as an oil price shock drove the economy into recession in the first half of the year, but has been sidelined since July.

"People are calling for the Bank of Canada to cut rates at the next meeting," said David Bradley, director of foreign exchange trading at Scotiabank.

The implied probability of a Bank of Canada rate cut at next week's interest rate announcement has climbed from 22 percent after a speech by Governor Stephen Poloz last week to more than 30 percent, while the market has nearly fully discounted a rate cut in May.

The prospect of easing helped drive the yield on the Canadian government's two-year bond to a four-month low.

Even so, "the market is underpricing the probability of a rate cut next week," said Andrew Kelvin, senior rates strategist at TD Securities.

A Jan. 7 speech by Poloz had left investors doubtful he would cut Canada's benchmark rate this month.

However, the central bank's quarterly Business Outlook Survey has since found that business sentiment has deteriorated, while investment and hiring intentions have fallen to their lowest levels since 2009.   Continued...